Tuesday, July 18, 2006

China's GDP Growth Reached 11.3%

It actually appears that I was too cautious when I wrote that China had "nearly" 11% growth during the second quarter, as the actual number turned out to be 11.3%. With industrial production growth accelerating to 19.5% in June, growth momentum is continuing to pick up.

This extraordinarily high growth number is mostly a result of a super-competitive economic structure, with no welfare state and (partly for that reason) an enourmous supply of motivated workers and a extremely high savings rate, but it is also a result of a inflationary monetary policy. The latter have created great excesses in certain sektors.

Now, because China's structural growth rate is so extraordinarily high, I don't expect any kind of recession in China once the malinvestments created by the inflationary monetary policy is unfolded. But it will nevertheless mean that a lot of the hard earned savings of the Chinese people will be wasted and that growth will slow significantly

The Chinese government is well aware of these excesses and have therefore introduced some administrative controls to rein them in. But this will likely only have a limited success and is likely to further swell the trade surplus and therefore the excessive foreign exchange reserves. As these reserves are invested in assets with low returns,. this too will inevitably mean wasting the hard-earned savings of the Chinese people.

Tthe obvious solution, as I've stated repeatedly, is to significantly revalue the yuan, something which would enable the Chinese authorities to rein in credit growth without swelling the trade surplus. But unfortunately, it seems that this will not happen because of irrational nationalistic pride in "resisting foreign pressure".

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